Financial Reporting Decisions
8 December 2015
Contents
Page
1.
2015/002 – Irish Residential Properties REIT plc .................................................................. 1 – 5
2.
2015/003 – IFG Group plc ...................................................................................................... 6 – 7
3.
2015/004 – UDG Healthcare plc ............................................................................................ 8 – 9
4.
2015/005 – Paddy Power plc .............................................................................................. 10 – 12
5.
2015/006 – Dragon Oil plc....................................................................................................13 – 14
Issuer
Irish Residential Properties REIT plc
Report type
Annual financial statements
Reporting period
Period ended 31 December 2014
Financial reporting framework
IFRS-EU
Applicable financial reporting
standards
IFRS 7 Financial Instruments: Disclosures
IFRS 13 Fair Value Measurement
IAS 1 Presentation of Financial Statements
IAS 7 Statement of Cash Flows
IAS 24 Related Party Disclosures
Transparency (Directive 2004/109/EC) Regulations 2007
(‘S.I. 277 of 2007’)
Corporate Governance Code
Irish Annex to the Corporate Governance Code
Summary
Irish Residential Properties REIT plc (‘the issuer’) provided IAASA with a number of undertakings to
enhance disclosures in future periodic financial statements with regard to, amongst other matters:
a) property valuation disclosures;
b) key management personnel compensation;
c) interest rate risk sensitivity;
d) the statement of cash flows; and
e) various disclosures relating to the Corporate Governance Code and the Transparency
(Directive 2004/109/EC) Regulations 2007 (S.I. 277 of 2007).
Background
The issuer is a Real Estate Investment Trust and owns approximately 1,500 multi-unit residential
rental apartment properties in or near urban centres in Dublin.
IAASA performed an unlimited scope examination of the issuer’s annual financial statements for the
period from 2 July 2013 (date of incorporation) to 31 December 2014, that being the issuers first
annual financial statements.
Outline of financial reporting treatment applied by the issuer and outline of decisions made by
IAASA
1.
Property valuation – IFRS 13
Treatment
Finding
In its 2014 annual financial
statements, the issuer disclosed
that the “capitalisation rate” and
“stabilised net rental income” were
the key unobservable inputs.
Stabilised net rental income represents the net rental
income from a stabilised portfolio, defined as all
properties owned continuously during an accounting
period.
With regard to the capitalisation
rate, the issuer disclosed the
information required by IFRS 13.93.
Decision 2015/002
However, with regard to, the stabilised net rental
income, the issuer’s fair value notes did not disclose:
a) a description of the valuation technique and the
1
inputs used in the fair value measurement of the
investment property [IFRS13.93(d)];
b) quantitative information about the significant
unobservable inputs used in the fair value
measurement of investment property
[IFRS13.93(d)]; and
c) the narrative description of the sensitivity of the fair
value measurement to changes in unobservable
inputs if a change in those inputs to a different
amount might result in a significantly higher or lower
fair value measurement [IFRS 13.93(h)(i)]
As part of their engagement with IAASA, the directors
referred to the fact that the Decisions related to the first
annual financial statements of the issuer and committed
that all the matters raised would be dealt with for
subsequent reporting periods. Accordingly, they
undertook to include the stabilised net rental income as
a significant unobservable input and to disclose the
information required by IFRS 13.93 (d) and IFRS
13.93(h)(i) in future periodic financial statements.
2.
Key Management Personnel compensation
Treatment
Finding
The financial statements disclosed
an amount for directors’
remuneration under the following
categories:
The key management personnel compensation note did
not disclose the information required by Paragraph 17 of
IAS 24 Related Party Disclosures. IAS 24.17 requires an
entity to disclose key management personnel
compensation in total and for each of the following
categories:
a) fees for services as Directors;
and
a)
short-term employee benefits;
b)
post-employment benefits;
c)
other long-term benefits;
d)
termination benefits; and
e)
share-based payment.
b) fees for other services.
The directors provided an undertaking that future
financial statements will disclose the information
required by IAS 24.17.
3
Interest rate risk
Treatment
Finding
The financial statements disclosed
that:
The interest rate risk disclosure note did not disclose the
methods and assumptions used in the calculation of the
interest rate risk sensitivity, as required by paragraph
40(b) of IFRS 7 Financial Instruments: Disclosures.
“An increase or decrease in interest
rate by 100 basis points will result
in an increase/decrease of interest
payable of €1.3 million and
Decision 2015/002
The directors provided an undertaking that future
financial statements will disclose the methods and
2
€20,000, respectively, on debt of
€125 million, on an annualised
basis”
4
assumptions used in the calculation of the interest rate
risk sensitivity.
Operating income items related to financing and investing activities – Statement of Cash Flows
Treatment
Finding
Included in the Statement of Cash
Flows was an amount of
€2,415,000 for “operating income
items related to financing and
investing activities”.
The composition of the item “operating income items
related to financing and investing activities” was not
disclosed in the financial statements.
Paragraph 10 of IAS 7 Statement of Cash Flows states
that the Statement of Cash Flows shall “report cash
flows during the period classified by operating, investing
and financing activities.”
The directors provided an undertaking that future
financial statements will provide the composition of the
item “operating income items related to financing and
investing activities”.
5
Audit Committee Report – significant issues
Treatment
Finding
The Report of the Audit Committee
was disclosed on pages 33 and 34
of the issuer’s 2014 Annual Report.
The Report of the Audit Committee did not disclose the
significant issues that the Audit Committee considered in
relation to the financial statements
Section C.3.8 of the Corporate Governance Code 2012
requires an issuer to describe in its annual report the
significant issues that the Audit Committee considered in
relation to the financial statements and a description as
to how these issues were addressed.
The directors provided an undertaking that the Report of
the Audit Committee will be expanded in future annual
reports to include the significant issues that the Audit
Committee considered in relation to the financial
statements.
6
Audit Committee Report – oversight of Risk Management
Treatment
Finding
The Report of the Audit Committee
was disclosed on pages 33 and 34
of the issuer’s 2014 Annual Report.
The Report of the Audit Committee did not provide a
description of the work done by the Audit Committee
relating to the oversight of risk management.
Sections 5.1 and 5.2 of the Irish Annex to the Corporate
Governance Code requires an issuer to explain in its
annual report the work done by the Audit Committee
relating to the oversight of risk management on behalf of
the Board.
The directors provided an undertaking that the Report of
the Audit Committee will be expanded in future annual
reports to include the work of the Audit Committee with
regard to its oversight of risk management.
Decision 2015/002
3
7
Valuation basis – terminology
Treatment
Finding
The financial statements disclosed
the following terms:
The terms were not defined in the financial statements.
a) capitalisation rates;
b) equivalent yield;
c) stabilised net rental income
(‘NRI’); and
d) estimated annual rent.
Paragraph 112(c) of IAS 1 Presentation of Financial
statements states that the notes to the financial
statements will “provide information that is not presented
elsewhere in the financial statements, but is relevant to
an understanding of any of them.”
The directors provided two undertakings:
a) to ensure consistency with the terminology used by
external valuators the term “equivalent yield” will be
used for the commercial component of the
investment property in future financial statements;
and
b) to aid users understanding of the financial
statements the following terms will be defined in
future financial statements:
8
-
net initial yield;
-
capitalisation rate
-
equivalent yield;
-
stabilised net rental income; and
-
estimated annual rent.
Responsibility Statement
Treatment
Finding
The Responsibility Statement is
included in the Statement of
Directors’ Responsibilities.
The Responsibility Statement did not refer the
description of the principal risks and uncertainties that
the issuer faces.
The requirements for the responsibility statement are set
out in Regulation 5(4)(c)(ii) of the Transparency
(Directive 2004/109/EC) Regulations 2007 (S.I. 277 of
2007).
The directors provided an undertaking that the wording
of the responsibility statement will be amended to
comply in full with the requirements of Regulation
5(4)(c)(ii) of S.I. 277 of 2007 for future financial
statements.
9
Proposed dividends
Treatment
Finding
The financial statements disclosed
that:
The total amount of proposed dividend was not
disclosed and such disclosure is required by paragraph
Decision 2015/002
4
137(a) of IAS 1 Presentation of Financial Statements
“… the Directors have resolved to
pay a maiden dividend of 0.48 cent
per share in the form of an interim
dividend to be paid on 31 March
2015 to shareholders on record as
at 20 February 2015.”
The directors provided an undertaking that future
financial statements will disclose the information
required by IAS 1.137(a).
IAASA will conduct a follow-up examination of the issuer’s annual financial statements for the year
ended 31 December 2015 to evaluate the extent to which the undertakings have been met by the
directors.
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Decision 2015/002
5
Issuer
IFG Group plc
Report type
Annual financial statements
Reporting period
Year ended 31 December 2014
Financial reporting framework
IFRS-EU
Applicable financial reporting standards
IFRS 8 Operating Segments
Summary
This financial reporting decision concerns the information reviewed by the Chief Operating Decision
Maker (‘CODM’). In particular, IAASA considered that the absence of disclosure of certain segmental
information in the financial statements did not fully comply with IFRS 8 Operating Segments.
IFG Group plc (‘the issuer’) provided IAASA with undertakings to enhance its operating segment
disclosures in future periodic financial statements.
Background
The issuer is a financial services company providing pension administration and independent financial
advice. Under IFRS 8 an entity is required to disclose information about its operating segments, its
products and services, the geographical areas in which it operates, and its major customers.
IAASA performed a focussed examination of the issuer’s annual financial statements for the year
ended 31 December 2014.
Outline of financial reporting treatment applied by the issuer
In its 2014 annual financial statements, the issuer disclosed that it had two operating segments. The
issuer also identified the CODM as being the Group Chief Executive Officer (‘CEO’).
The issuer’s IFRS 8 note did not disclose:
a) a measure of the total assets and liabilities for each reportable segment [IFRS 8.23];
b) reconciliations of the total reportable segments’ assets and liabilities to the entity’s assets and
liabilities [IFRS 8.28(c) and (d)];
c) the amounts of additions to non-current assets other than financial instruments, deferred tax
assets, net defined benefit assets and rights arising under insurance contracts [IFRS 8.24(b)];
and
d) a description of the “types of products and services from which each reportable segment
derives its revenues”. [IFRS 8.22(b)]. The information required by IFRS 8.22(b) could be
obtained from the Strategic Report. However, the Strategic Report did not form part of the
IFRS set of financial statements.
With regard to items a) to c) above, the issuer informed IAASA that its rationale for not providing the
disclosures was that:
a) a measure of the total assets and liabilities for each reportable segment is not regularly
provided to the CODM and accordingly the disclosures required by IFRS 8.23 and the
reconciliations required by IFRS 8.28 (c) and (d) are not relevant; and
b) non-current asset additions are not regularly provided to the CODM. The issuer explained that
the CODM reviews working capital and overall balance sheet performance on a Group wide
basis and accordingly the disclosure required by IFRS 8.24 is not relevant.
Decision 2015/003
6
In explaining how the CODM makes decisions regarding the allocation of resources when the total
assets and liabilities for each reportable segment together with the non-current asset additions are not
provided to the CODM, the issuer explained that:
a) each segment has its own legal entity structure;
b) the CODM is on the Board of each reportable segment and receives extensive financial
information at that level;
c) the CODM has full visibility of the assets and liabilities of each segment through his
membership of the subsidiary Boards; and
d) at group level, the day-to-day running and management of the businesses are delegated to
executives.
Outline of decisions made by IAASA
IAASA reviewed the segmental monthly reporting information pack provided to the CEO (CODM)
which at group level does not include segmental assets and liabilities. The issuer’s interpretation of
the IFRS 8 requirements is that disclosure is only based on the information received by the CODM at
group level rather than segmental level.
However IFRS 8.23 states:
“An entity shall report a measure of total assets and liabilities for each reportable segment if
such amounts are regularly provided to the chief operating decision maker….”
IFRS 8.24(b) states:
“An entity shall disclose the following about each reportable segment if the specified amounts
are included in the measure of segment assets reviewed by the chief operating decision
maker or are otherwise regularly provided to the chief operating decision maker even if not
included in the measure of segment assets:
…..
(b) the amounts of additions to non-current assets other than financial instruments, deferred
tax assets, net defined benefit assets and rights arising under insurance contracts…..”
The issuer confirmed to IAASA that the CODM did receive information regarding the assets and
liabilities of each reportable segment in his capacity as a Board member of the subsidiary companies
and IAASA examined this material. The issuer, therefore, accepted IAASA’s view that the assets and
liabilities, together with the non-current asset additions of each reportable segment is being provided
to the CODM and, accordingly, the information should be disclosed in accordance with IFRS 8.
Outline of corrective actions undertaken or to be undertaken
Following engagement with IAASA, the directors undertook to provide in their next annual financial
statements to:
a) disclose a measure of the total assets and liabilities for each reportable segment [IFRS 8.23];
b) disclose the non-current asset additions for each reportable segment [IFRS 8.24(b)]; and
c) include a cross reference from the segmental disclosures note to the strategic report for the
description of the types of products and services from which each reportable segment derives
its revenues [IFRS 8.22(b)].
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Decision 2015/003
7
Issuer
UDG Healthcare plc
Report type
Annual financial statements
Reporting period
Year ended 30 September 2014
Financial reporting framework
IFRS-EU
Applicable financial reporting standards
IAS 36 Impairment of Assets
Summary
This financial reporting decision concerns the discount rate applied by UDG Healthcare plc (‘the
issuer’) in respect of determining the recoverable amount for its cash generating units (‘CGUs’) and
related disclosures.
Background
The issuer is an international provider of services to the healthcare industry and is in the process of
transforming its business from that of pharmaceutical wholesaling to one of global pharmaceutical
services.
The issuer has eleven CGUs across three operating segments. In the financial statements the issuer
has identified three CGUs to which significant amounts of goodwill have been allocated.
Paragraphs 55 to 57 of IAS 36 require the discount rate used in the value in use calculation to reflect,
amongst other matters, the risks specific to the asset. The discount rate should reflect the current
market return that investors would require from an investment with similar cash flows (amount and
timing) and risk profile of the investment.
IAASA performed a focused examination of the issuer’s annual financial statements for the year
ended 30 September 2014.
Outline of financial reporting treatment applied by the issuer
It was noted from the financial statements that the average discount rate used in the value in use
calculations was 10% and was unchanged since 2009.
The strategic direction of the issuer and its financial position has changed considerably over that time.
The issuer has re-focused its business away from pharmaceutical wholesaling and towards becoming
a provider of services to the healthcare industry. It has grown total assets by more than 50% and
revenue by more than 25% during that time.
The issuer confirmed that it used the Capital Asset Pricing Model to determine the weighted average
cost of capital (‘WACC’) which was the basis for its discount rate. The issuer also confirmed that it had
used a single group-wide WACC as the basis for discounting the cash flows for all the significant
CGUs rather than a CGU specific rate for each CGU. The issuer’s rationale for the single group-wide
discount rate being unchanged since 2009 was because it believed the discount rate gave a level of
prudence to the impairment review process.
IAASA noted that, notwithstanding the discount rate used, there was a substantial amount of
headroom available based on the issuer’s calculation.
Outline of decisions made by IAASA
Paragraphs 55 to 57 of IAS 36 require the use of an asset specific rate (as distinct from an average
group-wide rate). Paragraph A19 of IAS 36 requires the use of a market based discount rate that is
independent of the entity’s capital structure.
Paragraph A18 of IAS 36 requires that discount rates be adjusted “to reflect the way that the market
would assess the specific risks associated with the asset’s [bold emphasis added] estimated cash
Decision 2015/004
8
flows” and “exclude risks that are not relevant to the assets estimated cash flows or from which the
estimated cash flows have been adjusted.”
In addition, paragraph 134(d)(v) of IAS 36 requires disclosure of the discount rate for each CGU for
which the goodwill or intangible asset with indefinite life is significant.
IAASA concluded that:
a) the use of a discount rate based on a single group-wide WACC to discount all CGUs’ cash
flows does not comply in full with paragraphs 55 to 57 of IAS 36 and related guidance in
Appendix A of same; and
b) the issuer had not disclosed the discount rate for each CGU having a significant amount of
goodwill or intangibles as required by paragraph 134(d)(v) of IAS 36.
Outline of corrective actions undertaken or to be undertaken
The issuer provided undertakings to IAASA to:
a) discontinue its practice of using a single group-wide WACC to determine the recoverable
amount of its CGUs; and
b) disclose the discount rates by individual CGU with significant goodwill in future financial
statements.
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Decision 2015/004
9
Issuer
Paddy Power plc
Report type
Annual financial statements
Reporting period
Year ended 31 December 2014
Financial reporting framework
IFRS-EU
Applicable financial reporting standards
IFRS 3 Business Combinations
Summary
This financial reporting decision concerns the recognition separately from goodwill, of the identifiable
intangible assets acquired through a business combination [IFRS 3.10]. Paddy Power plc (‘the issuer’)
provided explanations as to why the intangible assets (i.e. brands and customer relationships)
acquired in a business combination were not recognised separately from goodwill. Following the
receipt of the issuer’s explanations, IAASA did not require the issuer to make corrective actions and
concurred with the issuer not to recognise the brands and the non-contractual customer relationships
as intangible assets for its 2014 business combinations.
Background
The issuer is an international betting and gaming group. IFRS 3 Business Combinations is applicable
when an acquirer obtains control of a business as a result of an acquisition. Any goodwill arising on
acquisition is recognised as an asset and is tested for impairment on an annual basis. IFRS 3 also
requires an acquirer at the acquisition date, to recognise separately from goodwill, the identifiable
intangible assets acquired, the liabilities assumed and any non-controlling interest in the acquiree.
A large percentage of the assets of equity issuers’ under IAASA’s remit is made up of goodwill and
intangible assets acquired. Therefore, equity issuers’ recognition (or non-recognition) of goodwill and
intangible assets following a business combination was an area of focus for IAASA during 2015
examinations and included in IAASA’s 2015 Observations Document.
IAASA performed a focussed examination of the issuer’s annual financial statements for the year
ended 31 December 2014.
Outline of financial reporting treatment applied by the issuer
In its 2014 annual financial statements, the issuer disclosed that it acquired betting shops for €8.3m
The issuer informed IAASA that it acquired 23 betting shops in 2014. The identifiable net assets
acquired and recognised comprised of Property, Plant and Equipment of €0.6m and goodwill of
€7.7m. The goodwill accounted for 93% of the total consideration price.
IFRS 3.10 and IFRS 3.B31 requires an acquirer to recognise, separately from goodwill, the
identifiable intangible assets acquired through a business combination. IFRS 3 indicates that an
intangible asset is identifiable if it meets the separability criterion or the contractual-legal criterion.
The issuer informed IAASA that no identifiable intangible assets were acquired for the following
reasons:
a) the betting shops once acquired no longer trade under their existing brand and immediately
assume the issuer’s brand; and
b) there are no contractual arrangements with customers to ascribe a value to, and even though
there may be non-contractual customer relationships, there is no guarantee that these
relationships will continue into the future or that they could be accurately and separately
valued.
Decision 2015/005
10
(1) Brands
Paragraphs 30 of IFRS 13 Fair Value Measurement and B43 of IFRS 3 Business Combinations both
indicate that to protect its competitive position, an entity may intend not to use an acquired nonfinancial asset actively, or it may intend not to use the asset according to its highest and best use. In
such circumstances, the entity must measure the fair value of a non-financial asset assuming its
highest and best use by market participants.
In providing its detailed explanation as to why the brands acquired on acquisition had not been valued
in line with IFRS 13.30 and IFRS 3.B43, the issuer explained that the:
a) betting shops acquired in 2014 were shops of smaller competitors. Relative to the issuer the
betting shops do not have a significant brand presence in the wider retail gambling market
and would not be as well known outside of the specific locations where they operate;
b) the “brand” of the acquired shop is oftentimes the name of the vendor or the location of the
shop. The issuer indicated that it did not acquire the right to the brand name and placed no
restriction on the continued use of the brand by the vendor post the acquisition. In fact the
value of the brand is not part of the net assets acquired in return for the consideration paid by
the issuer to the vendor;
c) the economic rationale for paying €8.3m for €0.6m of Property Plant and Equipment was to
try to acquire betting shops in locations where there is a demand for gambling services. The
issuer also explained that the premium paid for the acquired businesses represents the
issuer’s ability to increase its retail branch network and to utilise the issuer’s brand and
industry knowledge to improve the financial performance of the acquired businesses in order
to add to the overall value of the issuer.
(2) Non-contractual customer relationships
It appeared to IAASA that the issuer may have had non-contractual customer relationships.
Paragraph IFRS 3.IE28 appeared to be of relevance:
Paragraph IE 28 of IFRS 3 states that:
“A customer relationship exists between an entity and its customer if (a) the entity has
information about the customer and has regular contact with the customer and (b) the
customer has the ability to make direct contact with the entity. Customer relationships meet
the contractual-legal criterion if an entity has a practice of establishing contracts with its
customers, regardless of whether a contract exists at the acquisition date. Customer
relationships may also arise through means other than contracts, such as through
regular contact by sales or service representatives” [bold emphasis added].
Given that the issuer acquired a number of businesses which were already operated as retail betting
shops, it could be argued that:
a) customer relationships were in existence on the acquisition date through regular contact and
indeed face to face contact with the original operator’s staff by accepting the bets in store;
and
b) the issuer may have acquired these betting shops in locations where there were no other
betting shops. In such cases, customers would continue to attend the same betting shop,
irrespective of whether the issuer acquired it or not. Such non-contractual customer
relationships may have a value if these customers continue to place their bets in the same
shop. It is possible that these customer relationships could be separately identifiable and
therefore have a value.
In explaining why it did not recognise any non-contractual customer relationships for its 2014
business combinations, the issuer informed IAASA that:
a) each of the issuer’s shops has a customer base which is separate and different to customer
lists. Customer bases do not meet the separability criterion or the contractual-legal criterion
Decision 2015/005
11
for recognition as an intangible asset;
b) the locations where the issuer operates would be competing against other betting shops. As a
result, customers would have a choice of betting shops and may not necessarily place a bet
with the issuer’s shop; and
c) it does not obtain any contact information for its betting shop customers.
Outline of Decisions made by IAASA
(1) Brands
Given that the issuer confirmed that it did not acquire the right to the brand and did not place any
restrictions on its continued use by the vendor, together with the other reasons outlined above, IAASA
concurred with the issuer in not recognising the brands as an intangible asset for its 2014 business
combinations.
(2) Non-contractual Customer Relationships
IAASA considered a customer base to represent a group of customers that are not known to an entity.
Non-contractual customer relationships that are identified as customer bases are not separately
recognised as an intangible asset because they do not arise from contractual or legal rights and are
not separable. IAASA concluded that it is appropriate that such customer bases to be included as part
of goodwill.
For the reasons outlined above, IAASA concurred with the issuer not to recognise non-contractual
customer relationships as intangible assets for its 2014 business combinations.
Outline of corrective actions undertaken or to be undertaken
None required as IAASA concurred with the issuer’s financial reporting treatment.
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Decision 2015/005
12
Issuer
Dragon Oil plc
Report type
Annual financial statements
Reporting period
Year ended 31 December 2014
Financial reporting framework
IFRS-EU
Applicable financial reporting standards
IAS 12 Income Taxes
Summary
This financial reporting enforcement decision concerns the treatment adopted by Dragon Oil plc (‘the
issuer’) in respect of the write-back of corporate tax over-provisions recognised in earlier years and
reversed in the current year. IAASA concurred with the issuer’s financial reporting treatment.
Background
The issuer is an independent international oil and gas exploration, development and production
company. Its principal producing asset is in the eastern section of the Caspian Sea, offshore
Turkmenistan. It has exploration blocks in partnership with other entities.
IAASA performed a focused examination of the annual financial statements of the issuer for the year
ended 31 December 2014.
Outline of financial reporting treatment applied by the issuer
The issuer, through its wholly owned subsidiary, operates a Production Sharing Agreement (‘PSA’)
between it and the Turkmenistan authorities for a term of 25 years which expires in May 2025 with an
exclusive right to negotiate an extension for a further period of not less than 10 years.
In its 2014 annual financial statements, the issuer recognised an income tax credit amounting to
US$160m relating to over-provisions in respect of prior years up to 2013.
The notes to the 2014 annual financial statements disclosed that:
a) in 2014, the issuer and the Turkmenistan authorities agreed to amend the provisions of the
PSA to bring the tax rate into line with the provisions of the Tax Code of Turkmenistan;
b) a tax rate of 20% is now applicable to the issuer in respect of its petroleum operations in
Turkmenistan;
c) the issuer has applied this rate in determining its tax liabilities as at 31 December 2014; and
d) the impact of the reduction in the tax rate is a reversal of US$160m in respect of an overprovision for prior years up to 2013, no longer payable.
The notes to the issuer’s annual financial statements for the year ended 31 December 2013 had
disclosed that:
“During 2008, the effective tax rate applicable to the Group’s operations in Turkmenistan was
increased by 5% to 25% by the Hydrocarbon Resources Law of 2008.The Group has
continued to apply this [25%] rate in determining its tax liabilities as at 31 December 2013.
The Group is in discussions with the authorities in Turkmenistan about the applicability of this
rate to periods prior to 2008, but it does not believe that these prior periods are affected by
this increase. A provision of US$11.1 million has been made in respect of the additional tax
that could become payable if the increased tax rate were applied to prior periods.”
Decision 2015/006
13
The enforcer queried the issuer seeking a reconciliation as to how the 2014 credit amounting to
US$160m reconciled to the US$11m disclosed in the issuer’s 2013 annual financial statements and
seeking a detailed explanation as to how the 2014 credit amounting to US$160m had been
measured.
The issuer explained that for the years prior to 2008, the tax rate in force in Turkmenistan was 20%
and that the issuer recognised and paid its tax obligations based on that 20% rate. Consequently, no
tax under/over-provision arose in that period.
The issuer explained that the Hydrocarbon Resources Law in Turkmenistan in 2008 increased the
rate from 20% to 25% but there was divergence in views between the issuer and the Turkmenistan
authorities as to the date from which this higher rate was effective – the Turkmenistan authorities
asserted that it applied from 2004 and the issuer believed that it applied from 2008. The issuer
measured its tax obligations based on the higher 25% rate from 2008 onwards but continued to pay
its taxes based on the 20% rate. The issuer provided for its best estimate of the amount it expected to
pay in respect of the period prior to 2008 and continued to contend that the higher 25% rate applied
only to years from 2008; accordingly, accrued taxes amounting to US$11m were recognised.
The issuer explained that in 2014, it agreed with the Turkmenistan authorities to amend the provisions
of the PSA to bring the tax rate into line with the provisions of the Tax Code of Turkmenistan and that
a 20% tax rate applied for all years, and not just for the period from 2008 to date. The issuer thus
recognised and paid its tax obligations based on that lower 20% rate.
As this 20% rate applied in 2014 and retrospectively to all previous years by virtue of the PSA being
renegotiated, this resulted in an over provision for taxation amounting to US$149m for the years 2008
to 2013 as the issuer had provided at a 25% rate for those years; the additional US$11m for the years
prior to 2008 was also recognised as on over-provision.
Outline of decision made by IAASA
IAASA concurred with the issuer’s financial reporting treatment and disclosures.
Paragraph 46 of IAS 12 requires that current tax liabilities be measured at the amount expected to be
paid to the tax authorities using the tax rates that have been (substantively) enacted by the end of the
reporting period. The issuer and the Turkmenistan authorities had agreed by 31 December 2014 that
the tax rate applicable on its petroleum operations was 20% for all periods up to and including 2014.
Outline of corrective actions undertaken or to be undertaken
None required as IAASA concurred with the issuer’s financial reporting treatment and disclosure.
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Decision 2015/006
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